Negotiating for investment in your new business or selling your business is a thrilling but stressful time. It’s exciting when the other party agrees to your proposed terms, whether over a bottle of Moët or just on a simple handshake. To ensure that the promise is honoured, it is best to get it on paper before the other party forgets or reneges.
A term sheet is a precursor document used during the negotiation stages. While it is not a legally binding document, except for a few clauses like confidentiality and exclusivity, it is a good way to document the proposed terms before the execution of a legally binding contract.
Benefits of using a term sheet
Having a term sheet increases the transparency of the terms in agreements. Especially if you are an early-stage startup, the terms in the final agreement may be unfavourable towards you, and hidden away behind legalise. The more simplified term sheet sets out the dealing generally, beneficial for you to discern what the essence of the agreement would be.
It is optimal for you, as a startup seeking investment or a party seeking to sell your business, to require a term sheet from the other party or provide a term sheet to a prospective investor or buyer before you start your due diligence process. This ensures that you don’t invest time and money without a good idea of the shape the final agreement would take. It also helps you ascertain if the other party’s plans and values align with yours.
What can I include in a term sheet?
You can include just about anything relating to the agreement in a term sheet, and usually includes any vital proposal points. While term sheets are usually not as detailed or complex, any proposed terms that you want to be in the final agreement should be included with enough certainty that both parties understand exactly how the final contract will be read. This essentially acts as your proposal, paving the way for further negotiations, or if the other party finds your terms reasonable, a signed promise that it will be reflected in the final agreement.
Is it really a good idea since it is not legally binding?
Certainly! Apart from the benefits discussed above, term sheets are widely used in the commercial landscape due to their flexibility and conceptual nature, allowing the parties to reflect project-specific considerations. From Uber Technologies Inc. (yes, that Uber) offering term sheets to investors in 2015 to sell $1 billion to $1.2 billion in convertible bonds, to IndiGo signing a term sheet for the purchase of 250 Airbus airplanes, term sheets are a prominent commercial fixture. If it is good enough for them, it is for you!
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